Profit sharing

What is profit sharing?

Profit sharing is a compensation strategy where companies distribute a portion of their profits to employees. It’s a way to reward team members for the company’s financial success and align their interests with overall business performance.

Instead of offering fixed bonuses or raises, employers share profits based on predefined formulas or discretionary decisions. The amount may vary depending on company earnings, individual roles, or time served.

How does profit sharing work?

Companies implement profit sharing in several ways:

• Discretionary plans: Employers decide how much profit to share and how to divide it among employees. There's no fixed formula or guaranteed amount.
  
  
• Pro-rata or formula-based plans: Profit shares follow a set formula, often based on salary level, tenure, or department performance.
  
  
• Deferred profit sharing: Companies contribute profit shares to retirement accounts like 401(k)s, offering long-term incentives for employee retention.
  
  

Employers typically distribute profit shares annually, although some may do so quarterly or biannually depending on company performance.

Why do companies offer profit sharing?

When employees see a direct link between their efforts and their earnings, they’re more likely to grow with their organization. 

Profit sharing helps companies:

• Motivate employees by tying rewards to company success.
• Improve retention through long-term financial incentives.
• Build a culture of ownership where everyone benefits from shared goals.
• Stay competitive when attracting top talent, especially in startups or cash-strapped businesses.

Examples of profit sharing 

• A tech startup distributes 10% of its annual net profits among all its employees based on their base salaries.
• A manufacturing company deposits profit-share bonuses into employees’ 401(k) accounts each year.
• A consulting firm rewards its top-performing teams with a higher share of quarterly profits tied to client revenue.
  
  

Profit sharing vs. bonuses or equity

Profit sharing, bonuses, and equity are distinct forms of compensation that differ in what they reward: company-wide success, individual performance, or long-term ownership potential.

• Profit sharing ties rewards to actual company profits, not just individual performance.
• Bonuses may be performance-based but aren’t necessarily linked to company profitability.
• Equity offers ownership in the company, often with higher long-term upside but more risk.
  
  

Some companies combine all three approaches to create compelling total compensation packages.

Things to consider with profit sharing

Before launching a profit sharing program, employers should:

• Define clear eligibility rules (e.g., full-time only, minimum tenure).
• Choose a fair and transparent distribution method.
• Stay compliant with local tax and labor laws, especially when contributions go into retirement plans.
• Communicate the plan clearly so employees understand how it works and what to expect.
  
  

How Remote can help

If you run a distributed or global team, managing profit sharing can get complex. Remote helps you set up compliant international payroll and compensation structures‌ — ‌including bonuses, profit shares, and benefits‌ — ‌no matter where your team is based.

We ensure you follow local regulations to set up a compensation structure that motivates top performers. Learn how Remote simplifies global HR and payroll.